There is a saying that banks only loan to those who don’t need it. Luckily, with the arrival of alternative lending in Canada, applying for a loan online can be a breeze. But anyone who has ever applied for a loan the traditional way (e.g. at your local bank) knows how much time and effort it takes to simply apply – that’s time away from your business and your loved ones. After a lengthy process and extended wait time, all too often, small business owners are left scratching their heads wondering why their loan applications were denied.
To put it simply, banks are notoriously risk averse. Unable to lend based on your true potential, banks may view small or new businesses as being risky by nature. It is no surprise then that traditional banks frequently deny small business loans, while online lenders like Lendified have high approval rates.
From co-signing on your child’s university loans, to a recent career switch, there are a multitude of reasons why a bank may deny your loan.
To simplify things, these reasons can be grouped into three key categories: Firstly, the bank’s analysis deems the business as risky. Secondly, the collateral in your business may be too low. Finally, your personal guarantee may not be strong enough.
Here is an overview of the top reasons why a bank may deny your small business loan:
Risky Business Analysis
- Lack of Experience in Business
The amount of time your business has been around is important to banks because they look at your business’ 3 year history to determine your credit score. This poses a serious obstacle for startups and new businesses that don’t have this history and, therefore, don’t have a credit score at all. Similarly, if you are used to handling cash and managing your business without credit, your business won’t have a sufficient credit score. If you are thinking of opening up a bank account to establish credit just before the loan is requested, don’t bother because you won’t have the 3 year history banks need for their assessment.
- Low Credit Score
Many factors are considered when determining a business’s’ credit score. For example, if your business has multiple credit accounts or is facing a lawsuit, these things may impact negatively a business’ credit score.
- External Factors
Certain industries are deemed less stable and therefore higher risk which banks try to avoid. Specifically, restaurants, construction companies and those who are ‘self-employed’ have a tough time getting bank loans because these industries are less stable.On a broader scale, recessions or unstable economies may also force banks to be more conservative on their loans.On a broader scale, recessions or unstable economies may also force banks to be more conservative on their loans.
Not Enough Collateral in the Business
- Business Assets Worth is Less than Sum of Loan
Typical assets might include Accounts Receivable, inventory, equipment and the building (if it is owned by the company). Things can change from year to year, and what might have been worth $10 000 last year may have depreciated in value since then.This is especially prevalent in startup tech companies where much of their collateral consists of technology – computers and software depreciate fast!
Your Personal Guarantee Is Not Strong Enough
- Personal Debt / Cash Flow Problems
If you have a history of making late credit card payments, this will lower your score. Similarly, banks will deem you risky if your personal loan exceeds more than 1/3rd of your current salary.Banks also consider co-signs – if you co-signed on your kid’s university loan, or guaranteed your parents’ home mortgage, this could impact your credit score.
- Current Job
Your current role may affect your credit score too because banks also look at your personal 3 year history. For example: if you’ve recently accepted a new job, a red flag may be raised if it is in a new industry where you don’t have any experience, or if it pays a lower salary
- Not Enough Personal Collateral
Your personal assets will be considered by banks as a last resort. Remember that collateral = assets – debt. Your home maybe worth a million, but it is only worth $200 000 to the bank if you carry 80% of it’s worth in a mortgage.Like with a business’ collateral, be aware that certain assets may have depreciated over time. For example: That volvo in your driveway might have cost $40 000 a few years ago, but it maybe only worth $10 000 now.
Though banks may have been the sole solution a few decades ago, now, they are no longer your only option. Lendified exists to help small business owners get that small business loan in as little as 24 hours.